Osmundsen, P and Tveterås, R. (2003) Decommissioning of petroleum installations—major policy issues. Energy Policy, 31(15), pp. 1579-1588
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Decommissioning of petroleum installations—major policy issues
Petter Osmundsen, Ragnar Tveterås
Abstract
FollowingtheBrentSparcontroversy,theOSPARcountriesreachedaunanimousagreementin1998forthefuturerulesfordisposalof petroleuminstallations.Thevastmajorityofexistingoffshoreinstallationswillbere-usedorreturnedtoshoreforrecyclingordisposal.
For installationswherethereisnogeneric solution,one shouldtakeacase-by-caseapproach.Weprovide asurvey ofinternational economic and regulatory issues pertaining to disposal of petroleum installations, and provide specific examples by analysing the Norwegiandecommissioningpolicy.Implicationsofdisposaldecisionsforthefishingindustry,acentralstakeholder,areanalysed.
Keywords: decommissioning; petroleuminstallations; externalities
1. Introduction
Disposal of obsolete offshore petroleum installations is a relatively new issue involving tens of billions of dollars globally.1 Powerfulplayers—multinationaloilcompanies, environmentalorganisationsandgovernments—allhave highstakeshere.Amajorpointofdisputeisthemagnitudeofsocialcostsintermsofexternalitiestootherusersof themarineenvironment.Theissueofpetroleuminstallationdecommissioningalsoraisesimportantquestionsabout, first,thepublic’swillingnesstopayforremoval,and,second,thereputationeffectsforoilcompaniesassociatedwith differentdisposaldecisions.
deep NorthernAtlanticwastheso-called‘BestPracticableEnvironmentalOption’(BPEO). Itwasconcludedthat
deep-waterdisposalwouldhavenegligibleimpactonthemarineenvironment,whichwasconfirmedbyindependent scientists.TheUKGovernmentapprovedthisoriginalplaninFebruary1995.
1 Disposal is defined as the process and/or agreement which brings an installation to its final location(s), where it is re-used, re-cycled or deposited (Anon., 1999, p.215). Decommissioningis definedasthe activitiesrelatedtobringing aplatform fromanoperating conditiontoa cold, hydrocarbon free condition (but does not include activities related to removal or other methods of disposal).
2Shell UK requested the international certification, classification andadvisorybodyDetNorskeVeritas(DNV),toperformacomparativeassessmentof theproposedoptionsfordisposalofBrentSpar(DNVReportNo.970911-0007).Thescopeofworkcoveredtechnicalfeasibility,safetyassessment, environmentalassessmentandpriceverification.
BrentSparisthemostrecentcasethathashighlightedthepublic’sconcernaboutthedisposalofoilinstalla-tions andthepotentialimportanceofreputationeffects.TheBrentSparwastakenoutofoperationin1991aftersome15 yearsofserviceintheBrentFieldinthenorthernNorthSea.Averylargefloatingoilstorageandloadingbuoythe Spar, had stored oil from theBrent ‘A’platform andactedas a tankerloading facilityfor the whole of the Brent Field. Studies by several independent companies established that deepwater disposal of the Spar at a site in the
Duringthesummerof1995,apublicprotestaroseinmanycountriesagainsttheplanneddeepwaterdisposalofthe Spar installation—strongly supported by environmental organisations. Reputational considerations lead Shell to abandondeepwaterdisposal,andinsteaddismantletheinstallationonland.ThenewdecisionwasapprovedbytheUK government.Disposalcostsincreasedfromanestimated38.5millionUSDforadeepwaterdisposaltoafinaltotalof 71.4millionfortheonshoredismantling,accordingtoShell(Lode,1999).ThisgivesanindicationofShell’svaluationof thereputationeffects.
In the process of developing a decommissioning plan, the oil companies use independent consultants and contractors to carry out environmental assessments, safety studies and cost analyses.2 These are
predominantly technical reports, undertaken by engineers,andtheyaregenerallynot availabletothepublic.
In spite of the interesting policy issues and the large sums involved, decommissioning of petroleum installationsseems to have been given scant attention by researchersofeconomics.Wegiveanoverviewofthe most important economic topics related to decommissioning and disposal, illustrated by recent Norwegian casematerial.
2. International decommissioning issues
Therearemorethan6500offshoreinstallationsworldwide,withanestimatedoverallremovalcostof20billion USD.Thereisagreatvarietyofinstallations,eachdesignedforaparticularsetofconditions:rangingfromfixed shallow-water structures in 30 m of water to tension leg platforms in 900 m of water. Some 490 installations (excludingsubseafacilities)arelocatedintheNorthSeaandtheNorthEastAtlantic.Themajorityofplatforms, aroundtwo-thirds,standinginlessthan75mofwaterorweighinglessthan4000tonnes,arereferredtoassmall structures,althoughthey can stillbethesize ofthe Housesof Parliament.Theremaining platforms,mainlyin NorwayandtheUK,comprise 112largesteelstructures—whichmaybeas highastheEiffelTowerandhavea footprint the size of a football field—and 28 concrete gravity base structures.In addition, there are some 26 floatinginstallations.Overthenext10–20years,anaverageof15–25installationsareexpectedtobeabandoned annually in Europe. This represents, amongst other materials, 150,000–200,000 tonnes of steel per year. The continentalshelfborderingthestatesoftheEuropeanCommunityandNorwaycountssome600offshoreoiland gasplatforms,400subseastructuresand600subseawellheads.
Atypicalplatformconsistsofthetopsides,whichcontainthedrilling,processing,utilitiesandaccommodation facilities,andthesupportingsubstructureorjacket.Steeljacketscanweighupto40,000tonnesandarefixedtothe seabedbysteelpiles.Thetopsidesthemselvescanweighupto40,000tonnes.Concretegravitybasestructuresare evenlarger,forexample,Trollon theNorwegiancontinentalshelfweighssome700,000tonnes,andsitsonthe seabed, stabilised by their own weight and penetration of the skirt into the seabed. In the absence of storing facilities,onlythetopsidesoftheplatformareincontactwithhydrocarbonsandmaycontainlimitedamountsof potentiallyhazardoussubstances,whereasthesubstructureor jacketisgenerallycleansteelorconcrete.
Cost–benefit calculationsare in this context needed for two types of decisions: (a) the choice of methodof removal and disposal of installations, and (b) timingissues. As for (a), after theproduction is closed down, topsides are in most cases taken to shore for recycling. Interesting policy issues, therefore, mostly pertain to the various solutions for the substructure. The basic decommissioning options are as follows:
(i) Leaveinplace.
(ii) Partial removal, with alternatives:
(a) emplacement/toppling on site, (b) carry to shore for recycling or disposal as waste, (c)deepwaterdisposal,(d)artificialreefs,and(e)re-use/otheruses.
(iii) Totalremoval,withalternatives:(a)carrytoshore for recycling or disposal as waste, (b)deepwaterdisposal,(c)artificialreefs,and (d)re-use/otheruses.
Artificialreefsmeanusingcleanedoffshoreplatformstocreatereefsformarinelife.Earlyevidenceindicatesthat suchreefsenhanceandprotectexistingmarinehabitatsandcreatenewhabitatsformarineanimalsandplants.3 Artificial reefs have been developed in the US, Brunei, Japan, Cuba, Mexico, Australia, Malaysia and the Philippines.
Thechoiceof decommissioningprocedureissubjecttostringentand extensiveinternational regulations.Still, considerablediscretionislefttonationalgovernments.In1958,theGenevaConferenceadoptedaConventionon thecontinentalshelf,requiringthatanoffshoreinstallationbeingabandonedmustbeentirelyremoved.The1982 UNConferenceoftheLawoftheSeaintroducedsomeexceptions,allowingsomeinstallationstobeleftinplaceas long asrequirementslinked to navigationalsafety, fisheriesandenvironmental impactweremet.The1989UN International MaritimeOrganisation(IMO) GuidelinesfortheRemovalof OffshoreInstallationsrequired that abandonedstructuresstandinginlessthan75mofwaterandweighinglessthan4000tonnesinair,excludingthe topsides,mustbeentirelyremoved.4 Platformsexceedingthoselimitsneedtobecutofftoallow55mofclearance between their highest point and the surface. The water depth limit will increase to 100 m for new platforms installedafter1January1998.DisposalatseaofoffshoreinstallationsintheNorthSeaorNorthEastAtlanticis regulated bythe OsloandParis Conventions.These twoconventions weremergedintoone (OSPAR)in 1997.
Following the Brent Spar controversy, the OSPARcountries reached a unanimous agreement in 1998 for the futurerulesfordisposalofpetroleum installations.5
3See section four for a further discussion and references.
4In addition, there are national regulations, which reflect the circumstances of the different countries. Since the UK and Norway are the only countriestohaveinstallationsinwatersdeeperthan75m,onlythesetwocountrieshavedevelopeddetailedproceduresandguidelinesfor offshoredisposal.Abandonmentplanshavetobeapprovedbygovernmentandthenecessarylicencesobtained.
5OSPAR Decision 98/3 on the Disposal of Disused OffshoreInstallations.
Thevastmajority ofexistingoffshoreinstallationswillbere-usedorreturnedtoshoreforrecyclingordisposal.
Exceptionsaremadeforcertaininstallations orpartsofinstallations intheeventthatanoveralljudgementin eachcase gives good reasonsfor sea disposal.For those installations where there isno generic solution,one shouldtakeacase-by-caseapproach,andconsiderablediscretionrestswithlocalgovernments.
Localdiscretionisconsiderablefortimingissues.Theproblemofdeterminingtheoptimalremovaldatecanbe considered as a cost minimisation problem (Amundsen, 1997). In determining optimal removal date, the oil companieshavetotradeoffanumberoffactors.Thecostsofkeepingtheplatformatseaafterclosingdownof production aremaintenance costs. From the perspectiveof the government, thereare alsoexternal effects to consider,i.e.,effectsonfisheriesandtheenvironment.Thebenefitsofdeferralofdecommissioning,however,may beconsiderable.Thesebenefitstaketheformofrealoptionsgainedbypostponingtheremovalofinstallations:
(1)theremaybepotentialgainsintheformofimprovedtechnologyofremoval,sincethisisanewindustrythatis attheverystartofitslearningcurve,and(2)theinstallationsmayonceagainbeusedforextractionpurposesin the event of recovery of new petroleum reservoirs in the vicinity of the platform or in the event that new technologymakesitpossibletouseexistingfacilitiesinproducingfrommoreremotereservoirs.
Twoissuesthatarenotanalysedthoroughlyinthispaper,butneverthelessdeservetobementioned,sincethey seem to have some influence on both international legislation and disposal decisions, are the population’s willingnessto payfora cleanenvironment,a publicgood, andreputationeffects stemmingfrom decisions on disposaloptions.
Althoughfewindividualsmayphysicallyexperienceobsoleteoffshoreoilinstallations,oneshouldconsiderthe possibility that the public may be willing to pay for their removal, even in the absence of environmental externalitiesintheformofpollution,etc.Asignificantproportionofthepublicprobablydesirethattheoceans arekeptclosetotheir‘‘natural’’state.Forexample,manyindividualsdonotlikethethoughtofoceansdevoidof mammalsfirst-hand.Analogously,individualsmaynotliketheideaoftheoceanbeingusedasa‘‘graveyard’’for largeoilinstallations,howeverfarthesemaybefromthecoastorseatravellanes.Hence,asthepublicmaybe willingtopayfortheexistenceofbluewhales,itmayalsohaveapositivewillingnesstopayfortherecyclingof redundantoffshoreinstallations.
Thenegativeexistencevalueofoffshoreoilinstallationsmaybeoneoftheelementsinfluencingthereputation costs associated with decommissioning. Reputation is often viewed as a strategic resource for the individual holder, as a positive reputation may provide the holder with goodwill capital. If a country’s—or company’s—decommissioning policies lead toa reduction in goodwill, other countries’ public opinion, special interest groups and governments may becomeless tolerant of its actions in other areas, and may even introduce direct reprisal actions in the form of public protests, boycotts or court actions. The Brent Spar and Exxon Valdez incidents are two cases where the oil companies involved seem to have perceived the reputation costs to be considerable and have been willing toincurextracoststoreducethese (SNF,1998,Chapter4).
3. Norwegian decommissioning policies
WenowdiscussdecommissioningwithreferencetoNorwegiancasematerial.Publiclyavailablegovernment reports containing details on decommissioning in specific fields, make Norway a good research choice in terms of availabledata.ThefactthatNorway—havingmanyofthelargestextractionfacilitiesintheworld—representsa large fractionofglobaldisposalcosts,makes itaninterestingcountryin itsownright.Therearealsoseveral reasonswhytheNorwegiancaseisofgeneralrelevance.InNorwaythereisawiderangeofoffshorepetroleum fields thatdiffer considerablywith respect to water depths anddesign of extraction facilities. Thus, it offers diversity regarding technical complexity and costs associated with removal. Further-more, the fact that NorwegianauthoritieshavearecordofhighenvironmentalstandardsmayimplythatNorwegiancasematerial maygiveindicationsastofutureglobaldevelopmentsinthedecommissioningarena.
The Norwegian Parliament sanctioned the OSPAR Convention. However, there is a number of large installations on the Norwegian continental shelf for which decommissioning is not regulated directly by the Convention. Concrete installations and steel jackets with weight above 10,000 tonnes are exempted from the OSPAR ban on sea disposal. For concrete installations, the Norwegian government has full discretion, i.e., they may be fully or partly removed, left in place, toppled on site for use as artificial reef, or dumped elsewhere. The Norwegian government also has partial discretion with respect to decommissioning of the six largest permanent steel installations on the Norwegian continental shelf,
6SeepropositionfromtheNorwegiangovernment,St.prp.no.8, 1998–99.
7 Two installations on the Ekofisk Field, two on the Oseberg field, and one on the Brage and Heimdal fields.
7 6
permanent steel installations on the Norwegian continental shelfi.e.,thejacketmaybeleftontheseabedbut not dumped elsewhere.8 After 9 February 1999, however, all new steel installations must be designed so that the total removal is feasible.
CharacteristicfeaturesoftheNorwegiancontinentalshelfaregreatdepthsandlargereservoirs,developed by large installations. Thus, the cost of decommissioning in the Norwegian sector is on an average considerably greater than in the rest of the world. There are approximately 6500 offshore oil and gas installationsintheworld,withanestimatedoverallremovalcostof20billionUSD.Decommissioningallof the Norwegian installations was in 1993 estimated to cost 7.5 billion USD, i.e., as much as 37.5 per cent of the estimated globalcosts.9 Such estimates arehighlyuncertain, though. Thereis not much experience inthis field;thefirstNorwegiandecommissioningplanwasissuedin1994.Newtechnologyandthedevelopmentof a decommissioning industryarelikely to bringdown removal costs. Thus,an estimatefrom 1995was5.4 billion USD for a total removal of all installations, and 1.8 billion for a partial removal.10 The total investments on the Norwegian continental shelf at that time, in comparison, were 100 billion USD.
Nevertheless,addingthefactthattheNorwegiangovernmentwillcarrymostofthecosts,andthatthemajor partofthesecostswillcomeinaperiodwhenpetroleumrevenuesaredecliningandthenumberofretireesis increasing,decommission-ingwillbeaconsiderablefiscalburdenforNorway.Byestablishingaconsiderable petroleumfund,however,theNorwegianauthoritiesshouldhavethemeanstosmoothoutthiseffect.
The procedures for decommissioning decisions are as follows. The license owners, represented by the operator, develop a detailed decommissioning plan. The plan is to examine and evaluate different decommissioningoptions.It has a conclusion,which canbe perceivedas anapplicationfor thelicensees preferred decommissioningoption. Thereafter, the planis submitted to the governmentand at the same time.circulated toa numberofenvironmental andfisheriesorganisationsforcomments.Theplanisthen reviewedbytheMinistryofPetroleumandEnergy,whichconsidersenvironmental,technical,economicand resource aspects. Furthermore, theministryconsiders international obligations andthe consequences for fisheries and shipping, and the comments of environmental and fisheries organisations. Typically, the recommendation from the Ministry toStortinget (the Norwegian parliament), lies somewherebetween
the recommendations from the licensees and the environmental and fisheries organisations. The latter
typicallyadvocateacompleteremovalofallinstallations,whereastheformerwouldoftenprefersomeofthe facilitiestoremainonthefieldortobedumped.TheMinistrywouldrecommendonlyspecialfacilities,such as pipelines,toremain ashore.Inthese recommendationsto Stortinget,it isemphasisedthateachfieldis uniqueandthattherecommendationsarenotintendedtoformaprecedent.ExistingNorwegianoffshore petroleum installations are very heterogeneous with respect to factors influencing decommissioning, such as external effects and removal costs, calling for a separate evaluation of each case.
3.1. Twodecommissioningcases:theOdinfieldand theEkofiskfield
Inthissection,weexaminetwodecommissioningcaseswhichcanbesaidtorepresenttwoextremeswith respecttothetechnicalcomplexityandcostsassociatedwithremovalofoffshoreoilinstallations,theOdin fieldandtheEkofiskfield.
A major part of offshore installation removal costs are mobilising and demobilising costs for specialisedvessels. These costs can be reduced if decommissioningcan be combined with other tasks performed by thespecialised vessels on the continental shelf. In addition,there areday ratesto bepaid forthevessels.Ifthereisalong transport distance related to deepwater disposal,the savings compared toland disposalarenot large.
InNorway,itispoliticallynotperceivedasanoptiontoleave steelinstallations withthetopsideintact, or totopple it on site.11 Furthermore, dumping of installationsin international watersis not viewedas politicallyacceptable.
8Provided that there are 55 m of clear water over the remains to ensure safety of navigation.
9See report to the Norwegian government,NOU, 1993:25.
10See proposition from the Norwegian government, St. prp. no. 36, 1994–95.
SeepropositionfromtheNorwegiangovernment,St.prp.no.8, 1998–99.
11
Oncetheexpensiveoperationofliftingthetopsideoffthejackethasbeenundertaken,itisoptimal—also ineconomicterms—totakeitonshoreforre-circulation.TheexperiencefromdecommissioningoftheOdin fieldontheNorwegiancontinentalshelfisthatitischeapertotakethetopsideonshorethantodumpit.
Partoftheexplanationisthatbydeepwaterdisposalthetransportationcostswouldbesimilartothoseof taking the installation ashore, and also it is much more costly to clean the facilities at sea. In addition, there is the question of future liability for dumped installations.
12SeepropositionfromtheNorwegiangovernment,St.prp.no.50,1995–96.
For the Odin field, the decommissioning study headed by Exxon, evaluated three different decommissioning options for the topside and the modules, as shown in Table 1.12
The licensees recommended alternative (a). Thisrecommendation was supported by the Ministry as being the best solution in both economic and environmental terms. Similar calculations were made for the substructure, as shown in Table 2.
Table 1
Decommissioning options for topside and modules
Alternative Estimated cost
(Mill USD) 15.5 18.5 (a) Remove and take ashore for recycling
(b) Remove and dispose on deepwater
(c) Placed on seabed as artificial reef 20.4
Table 2
Decommissioning options for substructure
Alternative Estimated cost
(Mill USD) 12.9 21.5 (a) Remove and take ashore for recycling
(b) Remove and dispose on deepwater
(c) Placed on seabed as artificial reef 8.4
Thelicenseesrecommended alternative(c),insitutopplingofthejacket,asa pilotprojectforartificial reefs.Aconditionfromtheoilcompaniesforchoosingthissolutionwasthattheownershipandtheliability oftheremaininginstallationweretransferredtotheNorwegiangovernment,withoutanycompensationto theNorwegianstate.Asforenvironmentalimpact,recyclingofsteel(comparedtoproductionofnewsteel) wouldreduceemissionsofCO2equivalentsandNO2by21,000and35tonnes,respectively.TheMinistry recommendedalternative(a);thesavingsof4.5millionUSDwerenotconsideredenoughtocompensatefor environmentaleffectsandtransferralofliability.Itwasnotruledout,however,thatalternative(c)couldbe relevantforotherfields.
ThecostsofremovingandrecyclingthepipelinesontheOdinfieldwereestimatedtobe8.7billionUSD.
Thelicenseesrecommendedthepipelinestobeleftontheseabed,afterbeingproperlycleaned.Havingbeen usedfor the transport of gas,the pipeline would befree of heavy petroleumremainings. The Ministry postponed the decommissioning decision about the pipelines, pending environmental evaluations and evaluations and negotiations about where liability should be placed for installations that are left permanentlyontheseabed.
TheMinistry’sdecommissioningrecommendationsfortheOdinfieldweresimilartothoseforNordst Frigg.13 Theoperator,Elfpetroleum,recommendeddumpingthemonitoringstationof6000tonnes,but was instructed to take it on shore for recycling. Pipelines remained on the seabed as possible negative environmental effects could not justify the considerable removal costs (11 million USD).
13See the proposition from the Norwegian government, St. prp. no. 36, 1994–95.
TheEkofiskfieldrepresentsadecommissioningcaseofafargreaterscalethantheOdinfield.Phillips Petroleum,theoperatoroftheEkofiskfieldontheNorwegiancontinentalshelf,hasrecentlypresenteda two-stagedecommissionplan,withatotalcostof1.1billionUSD.14 TheEkofiskfieldislocatedinthe NorwegiansectorofthecentralNorthSea.Thereisatotalof34installations,includingflarestacks,atthe Ekofisk and associated fields. Of these, 25 aremain structures, amounting to 3.5 million m3 of jacket volume.Approximately 25local pipelinesconnect theinstallations intheEkofisk area.These pipelines haveadiametervaryingfrom200to750mm.Themajorityofthepipelinesaretrenched,exceptforthe freeendsof30–100mneartheplatforms.Eachinstallationhasasafetyzonewitharadiusof500m.
AtthefirststageoftheEkofiskdecommissionplan,thetopsidesof15installationswithatotalweight of107,000tonneswillberemovedandtakenonshoreforrecyclingorre-use.Thisoperationwillbeginin 2003andthe estimated costs are 0.7billion USD. At the secondstage,to becommenced in2015,the substructures (steel jackets) of 14 installations with a total weight of64,000tonnes are to be removed at a total cost of0.4billion USD. These substructures have to beremoved under the OSPAR convention, while an exception is made for a concrete substructure weighing 1.2 milliontonneswhichwillbeleftinplace.Phillipsexpectsthatnewremovaltechnologieswillbeintroduced before2015,therebyreducingtheremovalcostsforthesubstructures.
RemovalcostsareofaverydifferentorderofmagnitudeinthecaseoftheOdinfieldandtheEkofisk field.TheexperiencefromtheEkofiskfieldsuggeststhatwhenremovalcostsarelarge,bothgovernment andoilcompaniesprefertodefer.Sincethereareotherfieldswithremovalcostsofasimilarmagnitude, onemayraisethequestionwhetherwe,overtime,willseeanaccumulationofnon-producingpetroleum installationsforwhichremovalisdeferred,untilonereachesapointwhenthetotalaccruedremovalcosts are too large to be carried by the society, with theeffect that large parts of the installations areleft standingattheabandonedfieldsindefinitely.
3.2. Tax treatment of decommissioning
Decommissioningraisessomeinterestingtaxques-tions.Asabackgroundforthisdiscussionwefirst presentthegeneralfeaturesoftheNorwegianpetroleumtax regime. The Norwegian petroleum tax systemisbasedontheNorwegianrulesforordinarycorporate tax, charged at 28 per cent of the corporate profit. Owing to resource rents, a special tax of 50 per cent has been added to this industry, implying a marginal corporate income tax of 78 per cent.15 Licences are allocated by a discretionary licensing system, with no up-front payments by the companies. Statoil, a 100 per cent state-owned company, operates on the Norwegian continental shelf on a commercial basis. Through the State’s Direct Financial Interest (SDFI), the Norwegian government is a passive stake-holder in many licences.16 In addition, the Norwegian state owns 40 per cent of Norsk Hydro, a central actor on the Norwegian continental shelf.
14SeeAnon(1999)andStavangerAftenblad,October22,1999.
As for tax treatment of decommissioning expenses, should (a) the oil companies be allowed appropriations in the tax accounts for future removal costs, or (b) should the actual removal costs be tax deductible?Neither is the case in the Norwegian Petroleum Tax Code. Instead, the state’s share of the removal costs is paid directly to the oil companies at the time of removal. These levies are individually sanctioned by the Norwegian Parliament. The main rule for the state’s share, estimated in each separate case, is the average effective corporate income tax rate the company has faced on the net incomes from the field. This system for tax treatment, which represents an equal tax treatment approach of all fields, is thus a cost-sharing rule that is mimicking the tax effect of scheme (a). If the oil company has been in a tax paying position in the entire period of operation, the state’s share is approximately 78 per cent. For the decommissioning of 15 platforms at the Ekofisk field, starting in 2003, the state is to pay about two-thirds of the removal costs.17 There are, however, exceptions to this cost sharing rule. In cases where the estimated state share is unreasonably low, the
state’s share can be increased, after application by the operator. For theNordst–Friggfieldthestate’sshare
wasincreasedfrom39.7to50percentafterapplication.Exxonappliedforincreasingthestate’sshareto 68percent,upfrom38.2percentaccordingtoscheme(a),andwasgranted50percent.18
15 AlthoughNorwegianpetroleumtaxationismainlyaprofitstax, royalty is payable on oil production from fields approved for developmentbefore1986,andrecentlyacarbontaxhasbeenimposedonpetroleum thatisburnt andon gasthatisdirectly released.Ithasbeen decided, however, that the royalties will be phased out over athree-year period. Also,theCO2-taxis likelytobereduced.
16 For more detailson the Norwegianpetroleum tax system, seeMPE(1998).
17 StavangerAftenblad,October22,1999.
18 SeepropositionfromtheNorwegiangovernment,St.prp.no.50,1995–96.
Although.the tax treatment of decommissioning costsdoes not conveyadvantageous tax credits, it doesseemtoprovidetheoilcompanieswithahigherprobabilityofobtaining a tax deduction than is the case for othercosts.
AccordingtoapropositionbillfromtheNorwegiangovernment(Ot.prp.no.33,1985–86),thereare several reasons why removal costs are given a special tax treatment. One objectiveis to avoid discrimination.Withatraditionaltaxtreatment,(b),a numberoffirmswouldnothavehadafulltax deduction,sinceatthetimeofremovaltheymaynothavehadsufficientincomegeneratedinNorwayto coverthecosts.Itisthusnotfairtosaythatthetaxprovisionsaredesignedtoreducethegovernment’s exposuretoabandonmentcosts.However,theydohavetheeffectofpostponingthestate’sshareofthe disposalcosts,andthesharingruleprovidesthegovernmentwithincentivestointernalisedisposalcosts.
Still,theparticulardisposalcasesrevealmoreofenvironmentalconcernthancostconscienceonpartof thegovernment,reflecting thepriorities ofthepoliticalparties.Itistoosoontojudgeon theseissues, though,sincesomelargedisposalcandidateshavebeenpostponed.
Another important objectiveof tax treatment of disposal costs is to avoid distortions in the companies’decisions,inparticulardistortionsthatreducetherecoveryrate.Traditionaltaxtreatmentof removalcostsmighttemptthefirmstoclosedownproductionearly,whiletheyhavesufficientrevenue, andrefrainfrombuildingoutadjacentreservoirs(satellitefields).
A reason why the oil companies were not allowed appropriations in the tax accounts for future removalcosts,(a),wasperhapsthefactthatthisapproachmightimply large tax advantages for the oil companies: because neither the timing nor the extent or costs of future removal could be established with a reasonabledegree of certaintyat the timeof appropriations,thesewould bearbitrary.Implicitinthisargumentisthebeliefthat the companies would have an incentive to exaggerate future removal costs, e.g., by underestimating the expected cost reductions due to advances intechnology,andtherebyobtainunduetaxcredits.
Inadditionto refundingpartsof thecompanies’shareof the removal costs, the Norwegian state would alsohave to carry the costs that accrue to the state equityshare in the various licences.
Assumingthattheprivateoil companies in a given licence have been in a taxpaying position for the entire period of operation, andthattheSDFIholds30percentofthelicence,Statoil20percent, and Norsk Hydro 15 per cent, the Norwegian state is to pay 90 per cent of the removal costs.20 If
20Note that if the companies have partly been out of a tax paying position, e.g., with an average tax rate of 30 per cent, the state’s share would be considerably lower.
StatoilandSDFItogetherheld80percentoftheequity(whichisthecase forsomelicences), thestate wouldbeaccountablefor97percentof theremovalcosts.21
In calculating the revised cost share, the government has taken into account the company’s future tax position in Norway,19 i.e., scheme (b) is applied. Thus, while the main rule is (a), rule (b) may be applied if the main rule is unreasonable.
4. Externalities to fisheries from oil installations
Inseveralareasaroundtheglobe,suchasofftheNorwegiancoast,themostimportantexternalities from offshore petroleum installations are to the fishing industry. Offshore oil activities have made considerable fishing areas inaccessible for fishing vessels. Hence, the disposal choice for obsolete installationsmayhavesignificanteconomicconsequencestofisheries.Thissectionanalysesthenatureof externalitiestofisheries,andprovidesestimatesfromacasestudyoftheEkofiskfieldontheNorwegian continentalshelf.
Offshore petroleum installations and pipelines occupy considerable areas in the Norwegian sector that werepreviouslyusedasfishinggroundsorrepresentpotentialfishinggrounds.Mostoilinstallationshave a safetyzonethat isclosed tofishing vessels.Pipelines on theseabedhavea reputationfor damaging demersaltrawl gear (Soldal, 1997).In addition, a large number of objects havebeen dumpedon the seabedinconjunctionwithoilactivities,leadingtodamageorlossoffishinggear.
21The state’s equity share, however, has been reduced in recent licensing rounds.
For both the fisheries and petroleum sector most of the production is exported. In 2000, exports of productsfromtheseafoodsectortotalledUS$3.4billion.ThisismuchlessthantheexportrevenuesofUS$
28.8 billion from the petroleum sector. But unlike the latter sector, fisheries should be able to maintain incomestreamsaroundthecurrentlevelsintoanindefinitefuture.TheNorwegianfishingindustryemployed 22,900 fishermen in 1997, while 16,000 were employed offshore and onshore in petroleum extraction.
However,thegreatershort-termmagnitudeofpetroleumrevenuesmayhaveleadtoafavourabletreatment ofthepetroleumsectorinareaswherethetwosectorshavehadconflictingeconomicinterests.
Thereexistno estimates of thetotalcosts tofisheries dueto lossof access,damages toequipment and pollution in the Norwegian sector. The estimated losses in estimated individual sectors are of minor significance,bothinabsolutetermsorwhencomparedtototalrevenuesfromtheNorwegianfishingsector.
However,withagradualshiftinpetroleumactivitiesfromthesouthernwatersoftheNorwegiansectortothe northern waters, where fish resources are much larger, the trend is that newpetroleum installations are locatedclosertothemoreimportantfisheries.
Untilrecently,thefocushasbeenontheeffectsofnewproductionfacilitiesonfishstocksandfisheries.
However, as some oil fields now approach their terminal phase, the focus is shifting towards disposal options for installations. An important topic is the potential externalities associated with different disposal options.
Although petroleum activities are generally being regarded as a source of negative externalities to the fisheries sector, it is recognised by some that there may be benefits from installations that have reached their cold phase.
There are several issues that need to be considered in an analysis of externalities to fisheries from abandoned installations.
* Stockpollution:Arethereanytoxicemissionsfromabandonedinstallationsthatcanleadtoincreased mortalityand/orreductioninthemarketvalueofthefish?
* Stockenhancementeffect:Doesthephysicalpresenceofoilinstallationsincreasethereproductiveability of fish stocks (fishing reefs), thus leading to an increase in fish biomass and harvesting potential?
* Stockconcentrationeeffect: Willthefishstocksgravitatetowardsthefeedstockthattendstogatheraround offshoreinstallations?
* Fishingaccess:Towhatextentdoesthephysicalpresenceofobsoleteinstallationsandpipelineslimitthe accessibilityofdifferenttypesoffishingvesselsanddifferentgeartypes?
There is no general answer to the question whether abandoned oil installations will pollute the surroundingfishpopulation.However,itisanticipatedthatfortheinstallationsintheNorwegiansectorthe costs associated with cleaning up after termination of production should be relatively small. The most visible pollution isusually pile cuttingson the seabed(Anon., 1999).Theenvironmental impacthas not beensuchthatithasaffectedthepricesoffishcaughtinthearea.
The above biological and technological factors together determine which disposal option is most beneficial to fisheries. In the following, we discuss these factors in more detail, partly with reference to studiesoftheEkofiskfieldonwhichweshallfocusinthesubsequentcasestudy.
Itisa conventionalwisdomamongfishermenthattheareasaroundshipwrecksareoftengoodfishing grounds (Valdemarsen, 1978). Several studies also suggest that offshore platforms may have beneficial effects for fisheries, because they serve as artificial reefsthat attract fish and alsoenhance the stockby allowingforanincreasedrecruitmentofjuvenilestocatchablesize.Thebehaviouroffishingvesselsinthe NorthSea alsoprovides strong indicationsofthe potentialeconomicvalueofhavingoil installations as artificialreefs.Trawlerstendtofishinacircleasclosetothesafetyzoneoftheplatformsaspossible.For instance, around the Ekofisk field Scottish purse seiners are involved in an intensive haddock fishery in periods (Soldal et al., 1999, p. 25). In the Gulf of Mexico there is competition
between commercial and leisure fisheries for the fishing grounds around abandoned platforms (Reggio, 1987;Gurney,1992).Despitealargeresearcheffortinseveralcountries,however,thereisnointernational consensus on whether artificial reefs have a significant stock enhancement effect or only positive stock concentration effects (Soldal etal., 1999, p. 80). There is probably no general answer, since reef effects depend on the characteristics of the marine environment in the particular area, such as fish species composition,nutrientconditionsandtopographicalconditions.
Theintroductionofareefgivesthreepossiblescenariosforthetotalfishbiomassanditsdistributionat a fishingground:(1)introductionofreefsleadsonlyto astockconcentrationaroundthereefs,(2)reefs causebothstockenhancementandstockconcentration,and(3)thereefcausesonlyastockenhancement effect,becausetheincreasedstockof fishmigratesfrom thereefsto thesurrounding areas,leadingtoa fairly even distribution of the biomass in a larger area. Hence, the question is not only what effects artificialreefshaveon thetotalbiomass,butalsowhateffectstheyhaveonthespatialdistributionofthe biomassintheareasaroundthereef.22
Reefscanincreasetheeconomicrentthroughanincreaseinsustainableharvestorareductionincost perunitofharvest.Theeconomicrentofthefisherycanincreaseevenifthepetroleuminstallationsonly haveastockconcentrationeffect.Thisisbecauseanincreasedconcentrationofthebiomassaroundareef can lead to anincreasein the harvestrate perunitof time,since thetimeneeded to search andfish is reduced. A necessary condition for an increase in the economic rent is that the fishing industry does not have to introduce fishing technologies that are more costly per unit of harvest.
If artificial reefs have a stock enhancing effect, and the fish migrates from the reef to surrounding areas, then some very interesting possibilities may open up for the regulation of the fishery. By creating a marine reserve around the reef to protect the reproduction of the fish stock, the regulator can secure a steady supply of biomass for harvesting in the adjacent areas.23 There will be a net benefit from creating a reserve, if the migration from the reserve area around the reef is sufficient to provide for an increase in the sustainable harvest that is larger than the foregone harvest in the marine reserve. Some fishing technologies may be physically prevented from operating in the vicinity of oil installations. Evidence from other countries suggests that efficient exploitation close to reefs requires specialised reef fisheries utilising a suitable gear.
22Therearetwobiologicalstudiesofthepotentialreefeffectsofthe Ekofisk field installations. According to Cripps and Aabel (1998) the existing working platforms in the Ekofisk area ‘‘are having a small, beneficial effect on local fish populations’’ (p. 15).
23One advantage of such a marine reserve is that it should bepossible to monitor the movement of vessels around thereef(s) atrelativelylowcosts,byinstallingaradarononeoftheinstallations.
Tveterås and Osmundsen (1999) provide estimates of the externalities to the fishing industry from obsolete Ekofisk installations. The estimates are derived under different fish population dynamics scenarios, using available fish stock data in the area. Sensitivity analyses were undertaken to provide estimates of the economic significance of oil installations as artificial reefs. Five scenarios were considered. In the first scenario the substructures of the platforms are removed and the only beneficial effect is the opening of the area to fisheries.
The other four scenarios assume that the substructures are kept in place. In the second and third scenarios fishing vessels are allowed to fish freely close to the abandoned installations. However, in scenario two 10 per cent of the biomass can be harvested by demersal trawlers due to fish migration to surrounding areas, while in scenario three the fish stock is only available to vessels with reef fishing technologies. In scenarios four and five, a marine reserve is created around the abandoned installations, i.e., reef fishing vessels are excluded from the area. In the fourth scenario the fish migrates to the surrounding open areas, thus making all of the sustainable harvest available to demersal trawlers. The mobility of the fish is assumed to be smaller in the fifth scenario, thus leaving only 20 per cent of the biomass to be harvested by demersal trawlers, while the remaining 10 per cent of the sustainable catch is lost due to mortality within the marine reserves. The marine reserve scenario four provides the highest rent. However, the estimated rent is small, only 3.9 million USD in net present value terms, less than 1 per cent of the estimated removal costs.
5. Summaryandconclusions
This paper has examined major policy issues associated with decommissioning of petroleum installations, usingtheNorwegiancontinentalshelfasacase study.Decommissioningisbecomingan increasingly important issue, as many offshore petroleum fields around the world are approaching the timewhentheirreservoirsareexhausted.TheBrentSparincidentsuggeststhatthisisalsoapolitically potentissueextendingacrossnationalboundaries.Internationalconventions,mostnotablytheOSPAR agreement,stillallowforalargedegreeofdiscretiononthepartofnationalgovernmentsinthecaseof pipelinesandlargeinstallations.
By signing international agreements such as the OSPAR, governments have constrained themselves tochoosingdecommissioningoptionswithlimitedadverse environmental effects.
Acknowledgements
We are grateful to Frank Asche, Håkan Eggert, Ove Tobias Gudmestad, Rögnvaldur Hannesson, and participants at seminars at the Norwegian Petroleum Directorate, the University of Tromsø, and the Norwegian School of Economics and Business Administration for useful comments and suggestions.
in this particular area must exceed the net loss to fisheries of removing the installations and the cost difference of removing installations, e.g., it must exceed 363.9 million USD in the case of Ekofisk. It is worth noting that Norway has a small population (5 million) and a large number of offshore platforms. In the area surrounding the Ekofisk field, there is a low fish density and a small share of the fish biomass is high value species. Thus, other areas on the Norwegian shelf have a considerably larger potential for increase in fish biomass and economic rent through an artificial reef program.
The most influential Norwegian fisheries organisation opposes artificial reefs. Adding the fact that environmental organisations strongly oppose reef programs, as well as the fact that the Norwegian government previously has not approved such applications, it is perhaps not surprising that the Ekofisk field operator, Phillips Petroleum, proposes to take the steel substructures on the Ekofisk field ashore. This disposal solution is estimated to cost 460 million USD, compared to 100 million USD for artificial reefs. For this decommissioning decision to be in correspondence with society’s cost–benefit calculations, the population’s willingness to pay for a clean seabed
Petroleum installations may function as artificial reefs that may provide positive fish stock concentration and enhancement effects, generating possible gains to specialized artificial reef fisheries but losses to demersal trawlers that will not be able to access the area. Calculations from the Ekofisk field at the Norwegian continental shelf show that leaving the installations as artificial reefs and establishing a marine reserve around the abandoned installation, is the option that generates the highest net present value to the fisheries. However, the future discounted net revenues for fisheries are small, less than 1 per cent of the disposal costs.
In a case study of the Norwegian continental shelf we saw that removal costs are of a very different order of magnitude for the Odin field and the Ekofisk field. The experience from the Ekofisk field suggests that, when removal costs are large, both government and oil companies prefer to defer. Since there are other fields with removal costs of a similar magnitude, one may see an accumulation of non-producing petroleum installations over time for which removal is deferred, until one reaches a point when the total accrued removal costs are too large to be carried by the society, with the effect that large parts of the installations are left standing at the abandoned fields indefinitely.
Disposal of petroleum installations raises a number of interesting questions. Examples are timing issues, tax treatment, and liability for installations that are permanently left at the seabed. New technology and discovery of new reserves in adjacent areas may make it optimal once again to use the facilities for extraction purposes. Thus, it may be optimal to postpone the disposal of platforms.
The costs of decommissioning programs depend on the choice of strategy. However, the decommissioning strategy not only influences costs, but also which parties are going to carry the costs. Potential winners and losers are oil companies, tax-payers, and different groups of fishing vessels. Hence, decommissioning is a cost–benefit problem involving important distributional considerations, with binding political constraints represented by the national and international environmental opinion, as well as tax-payers’ willingness to pay for a clean seabed.
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